With interest rates having risen sharply in the last year, K V Kamath, managing director and chief executive officer, ICICI Bank, believes that consumer demand could slow down.

In a conversation with Shobhana Subramanian, Kamath says he is convinced that corporate India's cash flows are strong and that most of the planned $450-billion investment should go through because the current tightening (the interview took place before last Friday's CRR and repo rate hikes) has not impacted growth.

Where are interest rates headed?

I wouldn't like to speculate. That's now something clearly set by policy action. Frankly, we did not anticipate such a sharp rise but we must appreciate that there was a challenge of having to control inflation--particularly, in a situation where probably some of the levers you needed to cool, say the food basket prices, weren't really available.

Do you think RBI is tightening liquidity at the cost of growth?

As of now the tightening liquidity has not impacted growth or investment in the real sector - both manufacturing and infrastructure. However, increasing interest rates has clearly hurt the consumption sector, particularly retail consumption.

Consumer lending has been impacted: the growth rate which was around 35-40 per cent is now in the range of 20-25 per cent.

Will the slowdown in the retail segment affect growth overall?

The base has become so high; what was 35 per cent on a low base will now be 25 per cent on a high base which is five times the size of the earlier base. So it should still help accelerate growth.

Are corporates getting worried because interest rates have gone up so sharply?

So far I have not received any such feedback. Neither is there any talk of the investment pipeline being impacted. I would believe that at this point in time, increased interest rates have not impacted the investment plans of corporates.

Do you think another rise of about 100 basis points would impact investments?

It will impact competitiveness but whether it will impact investments, per se, I'm not very sure. The reason I'm saying this is because a large part of the investments will come from internal accruals.

That is becoming the focal point of the growth story. So investment will happen. But then we get into working capital and the cost of doing business and the suppliers. They will have to carry the burden of the higher rate.

So you see the $450 billion investments pipeline that you've been talking about, going through?

I would say, that like any investment, there's an 80 per cent confidence level that this will go through. I'm not seeing any rollback of plans by anybody, not a single project.

Does that mean the India growth story is intact?

The growth story is very much intact and I would think the investment pipeline in the last one year has probably doubled.

Moreover, with the corporate profitability story intact, the ability to meet this large investment outflow, primarily through cash accruals is also intact. I would have thought that with any one of these wedges becoming loose, the growth story would have started to tumble, but all the wedges are in place.

Are banks like yours becoming more risk-averse now, are you a little more cautious than you were six months back?

Frankly, we became extra cautious after the crisis of the late nineties. Speaking for ourselves we are now learning or have learnt to do business in a changed context, where debt-equity ratios are not so high and there's more of equity.

Also, there are very few pure greenfield ventures, new entrepreneurs with new projects or completely greenfield sites. That sort of thing is not really happening.

Almost, every large project that you can think of is being put up by an existing entrepreneur, who has good cash flows and wants to leverage it properly. I think the context has changed dramatically and we're trying to work within these changed parameters.

So you have the same risk appetite that you had six months back?

Indeed yes, as of this moment we don't see the need to be over-cautious on the corporate side.

On the retail side, as interest rates rise and the EMI (equated monthly installment) for a family increases, there's always need to have a sharper focus on your credit selection. And that's a continuous process.

Are you seeing more non-performing loans in your retail portfolio?

Not really. The reason for that is pretty straightforward. While there is the burden of a higher EMI, wage increases have outstripped the interest rate increases. So the customer is still able to meet his or her commitments.

Are you concerned that Indian companies are buying overseas assets at somewhat inflated prices?

There are two issues here. The first is whether the price is right. Clearly, companies are getting into a bidding war which is resulting in escalating prices.

Whether it has gone beyond the comfort level, I can't say. But lenders need to watch the leverage that is being used and the pricing at which these deals are coming. The deals are coming in at very narrow spreads. It was fine when what you paid for these assets was low, but if you are getting pushed on the asset valuation, then bankers will need to re-look at pricing also.

Is there a real estate bubble?

Perhaps asset inflation in some parts of the country is not what it should be. To that extent you could say there is a bubble in some places. Will it burst or will there be a soft landing? It's too early to call.

In the UK, the bubble built up much faster than it did here but it has not burst. The asset inflation could have been a danger if wage increases were not happening. Wage increases have outstripped rate hikes so the buyer has holding power.

As long as a large part of the real estate is self occupied, I don't see a problem. What we really need to look at whether there is a land bank bubble. Where is it being funded from?

Now, there's an attempt to fund it from equity. Everyone needs to make his own assessment before investing but if you see the sort of correction there, somebody has lost money. Now, that much money has not been lost in the banking system by lending.

There's a lot of money coming into Fixed Maturity Plans, so is deposit growth getting affected?

This has always been the case, as there has always been an arbitrage. Some correction has been attempted in the budget and hopefully, it will get corrected further.

Are banks finding it difficult to mobilise deposits?

Despite this, deposit growth is robust because the savings potential is improving dramatically; the pie is increasing because of the GDP growth that we are seeing and the savings rate is increasing at a pace that we have not seen in the past.

There are savings from corporates, particularly from the public sector units, which are now very healthy in terms of operations and are throwing up large surpluses. They are a major source of deposit accretion. To some extent the private sector, but they use a variety of instruments.

And retail deposits?

By and large, the retail customer is still bank-oriented. Maybe at one cut, he goes to FMPs, but otherwise he is saving with banks. That's why you're seeing deposit growth in the mid-twenties. It has never happened, in the past thirty years, the average accretion to bank deposits has been 17 per cent.

Is it a good idea to rely on wholesale deposits?

Frankly, there is no fixed mantra on this; it has to be looked at in context. If investment in a country is not able to absorb all the corporate savings, I see no harm in those savings going into the banking system, to be used for productive purposes. After all, what is the function of a bank? Basically, allocating resources in an appropriate manner.

Isn't there a chance of an asset-liability mismatch?

We need to understand a corporate's cash flow requirements and the drawdown pattern. If you have that, you can run your ALM in a healthy manner.

One point we should note is that ten years back, corporates used to leverage themselves 2:1; it meant they were always short of cash. The situation was different, corporate money was fleeting.

Today, the highest accretion to banking deposits is coming from corporate money. Within corporate money it is coming from PSUs, and to me it's clear that the ability of the PSUs to invest money is not as strong as their ability to generate money.

I have not seen any reversing trend at all. I would say we are nowhere near a reversing trend, despite large investments. I'm watching, we're watching carefully to see any sign of reversal.